Wednesday, April 15, 2009

Wait, You Mean the Foreclosure Freeze Didn’t Work?

The headline to this column is a question you’ll increasingly see in the press over the next few months as foreclosures begin to filter their way through the default pipeline all over again. But don’t take my word for it — the Wall Street Journal discovered today that foreclosures are back on the upswing, so it must be true.

If you’ll recall, servicers nationwide had implemented a series of foreclosure moratoria that largely ran through the end of March. Many servicers — that would be JP Morgan Chase & Co. (JPM: 31.82 +3.65%), Wells Fargo & Co. (WFC: 18.80 +2.90%), and the like — had implemented a foreclosure and extended eviction halt at the instruction of the GSEs, whose loans they manage; they also had agreed to halt foreclosures for certain borrowers while the details of Obama’s Making Home Affordable program were being implemented and put into place.

The moratoria helped slow actual foreclosure sales the past few months, while the number of foreclosure starts (the start of the default process) have continued to pile up.

Fixed-income researchers at Bank of America Corp. (BAC: 9.84 -2.48%) on Wednesday noted that 90+ day roll rates, which measure the relative number of severely delinquent loans moving to foreclosure sale, have largely been suppressed by the foreclosure freezes. “Although the overall trend and levels for the prime, alt-A and subprime sectors have differed, on average, the [90+ days roll to foreclosure rate] dropped almost 10 percentage points, from around 25% per month to about 15% per month,” the researchers said in a note to clients. They expect to see a spike in foreclosure sales, however, over the next 1 to 3 months “as the moratoriums are lifted and loss-mitigation programs start to filter out ineligible borrowers.”

So we’re seeing a borrower backlog in the default pipeline. Are these borrowers exiting the pipeline via other means, since foreclosure hasn’t been a viable option recently? The data again suggests the answer is a resounding ‘no.’ While cure rates have been increasing in comparative terms over the course of the moratoria duration (essentially Dec. 2008 to Mar. 2009), in real terms cures remain tough to come by. According to data from Clayton Holdings, Inc., for example, the cure rate on 2007 vintage subprime first-lien RMBS in February was 8.16%; for 2007 vintage Alt-A first lien RMBS, the cure rate in February was 4.69%.

What we are seeing, however, is servicers quickly moving to clear bad assets as soon as the GSEs and government pressure points will allow foreclosures to proceed. Analyst Mark Hanson of The Field Check Group circulated data to subscribers last week showing that for California, among the state’s top five servicers, the volume of notices of sale surged more than 170 percent between February and March 2009 alone, from 4,410 NTS filings in February to 11,981 in March. (Notices of sale indicate an imminent foreclosure, usually within a 30 to 60 day timeframe, depending on locale.)

Which means that the financial press, consumer groups, and Capitol Hill are quickly coming to realize something that most of us from the mortgage space have long known to be true: the problem here isn’t entirely the mortgage instrument, and moratoria ultimately can do nothing more for most troubled borrowers than postpone the inevitable. From the Journal, an exercise in finding reality:

“We are getting so many of these cases where people don’t fit the new [Obama] program,” says Michael Thompson, director of Iowa Mediation Service, which works with troubled borrowers. Many borrowers are unemployed or underemployed or have credit problems that go well beyond their mortgage troubles, he says.

Many have been “playing for time” while the moratoriums have been in place, he says. But the delays have only increased the amount of interest and fees they owe, making their loans “nonviable in the long run.”

This should not be considered news to anyone inside the mortgage banking space, or anyone that reads HousingWire. As we’ve written about numerous times in this space, no amount of modification can replace a lost job, or a long-term loss of income. And with 15.6% of the nation’s workforce now either unemployed or underemployed, the problems in the nation’s mortgage markets are as much a broad economic problem as they’re a problem tied to blow-and-go underwriting standards and creative loan products.

“The bottom line is that there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium,” Field Check’s Hanson wrote in a note to clients last week. Here’s to hoping that we’ve already learned our lesson the first time around on this.